Awareness of unawareness is the title of a new paper by Karni and Viero (that ‘o’ should actually be one of these, but I can’t get it work on here). As mentioned in my previous post, I shall start by describing the paper for a non-economist audience, before giving a more technical discussion at the end.
For non-economists:
This paper addresses the question: How should we model decision making when there are aspects of our environment about which we are unaware? This is a very delicate question to pose. If we are unaware of something, then how can it affect our decision making process? Yet if we include it in our decision model, then we are no longer unaware.
Karni and Viero take an approach where they split the world into two different groups of states (edit – in decision theory, a state of the world is a complete description of your decision making environment. If we don’t know something about the environment, this is equivalent to not knowing which is the true state of the world). In the first group are the states of the world that we are fully aware of and can explain perfectly. In the second group are the states that we cannot fully conceive of yet. In the future we might learn more about the world, and some of the states move from the second group to the first.
To facilitate the modelling process, the states in the second group can be treated together as a lump of things that we don’t really know about yet. Although we don’t know anything about these states, we might still be able to form an estimate about how likely it is that they are important. Similarly, we might have a sense about whether these unknown outcomes are likely to be good or bad – we might be either fearful or optimistic about the unknown.
The Karni and Viero framework gives us a formal system within which we can quantify and describe these ideas of increasing or decreasing ignorance, and fear or optimism about the unknown. This might not sound like much but it is important get the foundations in place before we can start answering bigger, real world, questions about how ignorance and unawareness affect decisions.
There are other models that model the same sort of things as Karni and Viero; each of these frameworks have their own technical strengths and weaknesses. This a good thing – modelling unawareness is a tricky thing to do, and it would be amazing if the first attempt turned out to be the best one. At this point the literature is very young, and remains to be seen which approach will be the most useful for answering more applied questions.
For economists: